You’re feeling prudent and proud of it. As a free agent, you’ve got to shell out cash for insurance, and you’ve done so. You’ve insured your health, your life and even your teeth. So you’re covered, right?
Why You Need Disability Insurance
Not so fast. Suppose you become partially or completely disabled tomorrow and stay that way for years, whether from a work-related injury, car accident or chronic illness. If you lose the ability to earn, say, $50,000 per year for the rest of your working life, you’re probably out $1 million or more. Furthermore, "the chances are much greater that you’ll have a disability than that you’ll die," says James Walsh, president of Los Angeles-based Silver Lake Publishing, which specializes in books offering advice to consumers on insurance issues.
Aren’t You Already Covered?
You’re already covered by temporary disability or workers’ compensation insurance, right? Probably not, if you’re a sole proprietor. Even if you’re incorporated and -- as an employee of your own corporation -- covered by some form of state mandated disability insurance, the coverage is only for the short term and your benefits would likely be inadequate. And, workers’ comp only covers on the job injuries.
What about Social Security disability benefits? They’re hard to qualify for, and they’re probably not enough to keep food on the table and a roof over your head. So to cover yourself adequately against accident and injury, you’ll need to buy a disability policy to insure your income.
How Disability Insurance Works
With a disability policy, you pay annual premiums, and file claims to receive payments in the event of an injury or illness that prevents you from working. However, it usually covers only a portion of your lost income, not the whole thing. Unlike more familiar forms of insurance, "there’s flexibility to choose the coverage you want. It’s not as much a commodity product as term life, for example," says Walsh.
Variables of Cost and Coverage
To determine the terms of coverage you’re looking for, you must decide how much you can spend and how much uninsured risk you’re willing to expose yourself to. Here are some of the key variables:
- Amount of Monthly Benefits
You should be able to specify the level of benefits you receive, up to 60 or 80% of your income from work. (Insurers won’t cover 100% of income because they want you to be motivated to return to work after a disability.) The higher the benefits, the greater your premiums.
- Length of Benefit Period
A policy can specify that for a given disability, you’ll receive payments for a year, five years, until age 65 or even for life. The longer the benefit period, the more you pay.
- Length of Waiting Period or Elimination Period
The elimination period is the time that elapses between the onset of your disability and the beginning of benefit payments. If you can afford to wait six months for benefits to kick in, you’ll pay lower premiums than with a policy that starts paying you just one month after you stop working.
- Coverage of Total and Partial Disabilities
Your premiums will be higher if you buy insurance that covers a disability that reduces your earning power by half, for example.
- Own Occupation vs. Any Occupation
Less expensive policies won’t pay benefits in case your disability prevents you from continuing in your chosen profession, if you’re still able to perform other work. This could have the effect of forcing you into a new line of work.
Non-negotiable Items
You should insist that your policy is non-cancelable and guaranteed renewable. Also be sure that you can increase your coverage as your income increases and inflation eats away at the value of your fixed benefits. One more non-negotiable item: Don’t let yourself postpone that appointment with your insurance advisor to talk about disability. Next year may be too late.
